The Tesla Model S is a drop-dead gorgeous electric automobile that can go from 0-60 mph in 4.2 seconds and carries a sticker price of $80,000 at the high end. Tesla is also at the center of a debate on cronyism, consumer choice, and innovation.
Based in Palo Alto, California, Tesla Motors Inc. is an electric luxury car and battery manufacturer founded by inventor, scientist, and entrepreneur, Elon Musk, the current CEO. Rather than working through dealerships, Teslas are sold directly to consumers. Its only available model is the S, a midsize sedan, but the Model X, a hatchback, will be available in 2015. While zero-emission cars generally have to sacrifice looks and performance, Tesla manages to offer the whole package. Of course, that comes with a price: the Smart Car, one of the cheapest electrics on the market, has a suggested retail price of $28,750, while the Model S is one of the most expensive entirely electric cars currently available.
Tesla might also be the most interesting auto manufacturer out there right now. But despite its innovations and Musk’s seemingly free-market tendencies, the company is not shy about making friends with the government. Matthew Mitchell of Real Clear Markets tells people not to feel too bad for Tesla’s losses against franchises, because it’s been playing the exact same game. Tesla has worked a deal with state and federal governments in which — if you’re in a state where it’s legal to buy a Tesla — you get an immediate tax credit of $7,500 and some states offer credits up to $9,600. (If you do plan to buy a Tesla, I suggest going to Louisiana.) In 2010, Tesla received a $465 million loan from the Department of Energy. Tesla has also benefited from California’s zero-emission vehicle program, in which it reaped more than $40 million by trading zero emission credits. Thus, Tesla’s David-versus-Goliath battles with state franchise laws, while laudable, need to be put in perspective.
On October 21, Gov. Rick Snyder of Michigan signed Enrolled House Bill 5606 into law. Some have rightly nicknamed this the “anti-Tesla bill.” While direct sales from manufacturers to consumers were already illegal under Michigan law (there are six states where Tesla showrooms are illegal), this bill simply loosened the language — making it clear that manufacturers who do not have their own dealers may sell cars through another manufacturer’s dealer networks. Literally, the bill deleted one word from the law. Immediately after signing this bill and siding with auto dealers, Snyder said “the discussion should consider, first and foremost, what is best for Michigan consumers, for expanding economic activity, and for innovation in our state.”
OK, right. We should have a healthy, open discussion about the business model in Michigan, but Snyder never should have signed that bill. His background is in business, not politics. He knows that competition and a friendly environment for businesses are good for Michigan and yet he signed off on an anti-competitive bill. Michigan is famous for being the heart and soul of U.S. car manufacturing, an industry it still dominates. But manipulating the law and stifling competition won’t help Michigan’s economy or manufacturing industry. I recommend a study by Gerald R. Bodisch for the U.S. DOJ that analyzed the effect of franchise laws on economies. (Spoiler alert: he suggests eliminating these laws.)
Cronyism creates a massive moral hazard in that it undermines the free market system and ultimately our long-term prosperity. In an interview with Acton’s Religion & Liberty, author Peter Schweizer observed that these hand-in-glove relationships between businesses with the means to lobby and government elites with favors to hand out pose “an enormous threat” to our country. “They’ve convinced themselves, because they are ‘serving the public good,’ that's its okay for them to serve themselves as well by engaging in these crony activities,” Schweizer said.
The cost of lobbying the government and trying to legally shut down competition is staggering. According to Jared Meyer, policy economist at Economics21, the National Automobile Dealers Association, based in McLean, Virginia, spent $2 million lobbying for federal candidates in the current election cycle. The “Big Three” spent over $30 million collectively in 2014 on political contributions and lobbying efforts. Meyer said that Tesla’s political contributions were less than $10K.
In order to fight back against laws like the one just signed in Michigan, Tesla has a few options: it could keep battling franchise laws at the state level (as it is now doing in Georgia), it could partner with dealers, or it could work through the judicial system. All of these potential actions would be costly and would pull time and resources away from Tesla’s core business of building innovative electric cars and batteries.
Pretty much all automotive manufacturers, American or otherwise, are promoting and pushing EVs – with the help of hefty government loans and subsidies. Why are subsidies necessary? Because consumers don’t really want electric cars. According to a recent Detroit News article, less than one percent of car and truck sales are electric vehicles.
Legislators touted them as the “future of transportation” when these cars went mainstream five years ago, but they can’t compete against hybrids and gas vehicles. Thanks to low gas prices, improvements in gas mileage, the fear that an electric car’s battery will die before it gets to a charging station, and the high sticker price, consumers just aren’t interested.
Tesla, however, has been relatively successful in the short time it’s been around. In the Third Quarter 2014 Shareholder Letter, the company reports its highest ever quarterly deliveries: 7,785 cars. They expect to sell 35,000 by the end of the year. Of course, being a luxury brand and Elon Musk being one of the most interesting characters in the tech industry, those cars seem to appeal to a different type of consumer than most EVs.
Tesla is trying to change the industry for the better by making its patents “open source” as a nod to making the EV industry more “sustainable.” It’s planning on building a $5 billion battery factory in Nevada (yes, with tax incentives pegged at $1.3 billion), and it recently unveiled a self-driving prototype that it hopes to unleash on the market in the next few years, among other things. Imagine the things that Tesla, and other manufacturers, could be creating if they spent 100 percent of their time and resources innovating and zero percent lobbying or engaging in cronyism.
Earlier this year, Allister Heath, deputy editor at The Telegraph, wrote about the difference between crony capitalism and a true free market. Although he was not talking about the automotive industry, his conclusion is certainly applicable:
There is a simple answer to all of this and it doesn’t involve punitive taxation, demonising the rich or fuelling jealously. The solution is to promote competition, tear up barriers to entry, unleash consumer choice, eliminate subsidies and soft loans and make sure that the only way an entrepreneur, a CEO, a banker or an investor can make money is by serving customers, discovering new opportunities or allocating capital more efficiently.
If you choose to buy an electric luxury vehicle, with your own money, the government should not try to stop you with outmoded franchise laws. Likewise, let’s wean Tesla from government subsidies, incentives, and the real temptations of cronyism and find out if consumers really want to own its electric cars. Why not let the market decide?